In 1914 Henry Ford appalled his fellow automobile manufacturers by raising wages to $5 per day. This was twice the industry standard, and it prompted cries that Ford was spoiling workers for everyone else in the business. He countered that it was good not only for Ford Motor but for the American economy as a whole. "Our own sales depend in a measure upon the wages we pay," he said. "If we can distribute high wages, then that money is going to be spent, and it will serve to make storekeepers and distributors and manufacturers and workers in other lines more prosperous, and their prosperity will be reflected in our sales. . . . Country-wide high wages spell country-wide prosperity."

Ford's insight furnished the basis for much of American prosperity during the 20th century. Prior to Ford, employers had attempted to beat down wages, assuming that their workers' incomes had little connection to their companies' sales. Workers and customers were deemed to be separate, non-overlapping groups. But Ford, who intended to sell a car to every family in America, saw his workers as part of his customer base. If they couldn't afford cars, he couldn't sell them Fords.

More employers caught on, some voluntarily, others under the duress of strikes. By the 1950s, the American model of industrial economy was fairly perfected. Employers paid high wages; workers spent those wages on the goods they and other workers produced. Blue-collar workers gained a solid footing in the middle class, which became the center of gravity of American life. The economy as a whole grew steadily, year after year.

In The Big Squeeze, Steven Greenhouse picks up the story at this point, describing the postwar "social contract" by which management and labor acknowledged their interdependence. Greenhouse's focus is labor; he stresses the role of unions in ensuring that workers received their share of the growing pie. Yet he makes clear that management was an essential partner in the deal -- that General Motors' "Engine Charlie" Wilson, for example, was the necessary counterpart to Walter Reuther, the president of the United Auto Workers. The social contract, moreover, had the blessing of government. As Dwight Eisenhower explained it, "An American working man can own his own comfortable home and a car and send his children to well-equipped elementary and high schools and to colleges as well."

The social contract survived the turbulence of the 1960s, but it began to fray in the '70s, when rising oil prices and broader inflation eroded the purchasing power of workers. The contract broke down completely during the '80s. Deregulation of key industries, including airlines, trucking and telecommunications, played a part in its demise, as intensified competition among firms prevented them from passing the cost of wage hikes along to customers.

Government hostility to unions was no less crucial in destroying the mid-century model. From the 1880s to the 1930s, government had sided with capital in workplace disputes; from the New Deal to the 1980s, it had tilted toward labor. Ronald Reagan -- who, ironically, was the only president to have been the head of a union (the Screen Actors Guild) -- signaled the shift when he fired 11,000 air traffic controllers amid a 1981 walkout.